December 28, 2013

As you may know, I am reading Antifragile. So, this book has groovygirl thinking: how can gg make her investments more antifragile, not just robust.

So, looking at real estate investments, which is what gg is studying for her next long-term investment cycle (after or along side gold/silver). This is what gg is thinking about.

Antifragile means that the investment becomes stronger with adversity and stress, not just surviving.

Antifragile is about options. Groovygirl loves options, because it means she doesn’t have to be right about where the market is going.

Analyzing a real estate investment with little or no debt with positive cash flow.

Current advantages:

Tax advantages: depending on company structure, little to no taxes on cashflow income. Real estate is still one of the only investment incomes not touched by the government’s tax increases.

Even a total cash deal, with no debt, can produce returns of 5%-20%, tax-free. (Debt can increase the tax advantages, but reduce actual cash flow and possibly reduce options in the future.)

Past advantages:

Tax free capital gains, with tax-free cash flow, using large amounts of debt (other people’s money). Now we have a stagnant or negative capital gains and possible negative cash flow with the pressures on large debt deals in the US real estate market. What worked well before (since 1950), may not work in the next 15-20 years.

Future options:

Option #1

Real estate market stays the same as it is now. Little to no gains. High pressure on debt when Fed is not flinging free money at banks.

5-20% tax-free return with no to little capital gains. (gg is using a wide range of return percentages because rents tend to go up and down and each market is its own little world.) All gains are related to cash flow and tax-free. If gg needs to sell, she will get original investment back, no loss.

Option #2

Market advances and grows like it is 2004-2007. All gains are tax deductible if gg moves it into a 1030 exchange and buys more cash flow real estate. gg sells outright because she finds out she hates real estate investing 🙂 and pays a capital gains tax. Benefit: had cashflow returns of 5-20%.

Option #3

Government takes away tax advantages on cash flow from rents on residential or commercial property or both and/or capital gains and losses. gg can sell and get out and move cash into another investment class. gg can sell and carry a note to the buyer, creating a higher positive cash flow from the interest on the loan.

Option #4

Real estate market goes down. This is the one that gg is favoring, since Martin Armstrong has written about the long-term decline in the US real estate market from 2015 thru 2032.

gg can sell outright. Depending on the structure of the business/investment, gg can take an unlimited loss, if she sells and apply that loss to taxes on other income. (For tax questions, consult a professional. gg is not a tax professional.)

gg can sell and finance a loan to the buyer, creating continued, perhaps higher, cash flow.

gg can continue to collect positive cash flow.

With that cash flow, she can continue to buy more cash flow real estate as prices drop. Ideally, gg will have other income to live on, so this investment will be a wealth generator, not a living income, for several years. But if something unforeseeable should happen, it could be a living income.

Since the investment is debt free, rents going up or down may affect cash flow amount, but will not cause her to be in a negative cash flow position and forced to sell when it doesn’t line up with one of her exit plans (i.e. not profitable).

Since this investment has little or no debt, gg will not be “upside down” on it and have to put cash in just to get out.

gg will never have to worry about the banking system folding. She is her own bank for now. If it does fold, people will either want/have to to rent or need to be financed by someone other than banks (i.e. seller). The government may even create more incentives for real estate investors to pick up slack for a failing banking system and falling real estate market. Although, gg doesn’t count on the government doing things that would make sense 🙂

If and when markets stabilize near the end of the cycle, gg can sell for a tax-advantaged loss and get out or move into another investment cycle. She can finance the investment with low-interest debt (if that is possible) and get cash out, but still have the positive cash flow, without the risk of further falling prices. She can keep everything status quo and let the investment go up (as it will be a new real estate cycle) in value while creating positive cash flow.

Warning: gg is not a financial professional nor does she play one on television. This is not financial advice. She is just writing about what she might do with her own money in an area that interests her. You are responsible for your own money, education, research, and interests. Groovygirl has been studying real estate and real estate investing since 2006. Do not invest in anything without education. And always have several exit plans. Always consult a tax professional, as everyone’s tax liability is personal to their own circumstances. groovygirl is a long-term investor and extremely patience. So her plans reflect that mindset, you may not have that same mindset. That’s fine, it is not for everyone.

December 26, 2013

There are many good ideas and thought-provoking wisdom in the book. gg highly recommends it.

One idea is:

“The idea of proposing the Triad was born there and then as an answer to my frustration: Fragility-Robustness-Antifragility as a replacement for predictive methods.” Antifragile by Nassim Nicholas Taleb, Chapter 8, pg. 135.

groovygirl views this as a confirmation of the way she is looking at investments since 2005. Is the investment valuable as in the least, middle, and worst case scenarios? Does it put energy, time, and money into a long-term sustainable system, not just a protection against least and worst case scenarios?

As an example, let’s take food. We know that the current food distribution system is fragile in its design. There are only 3 days of food for a population in any given region. Anything, from an oil crisis to natural disaster to an infrastructure breakdown however local or short-lived, threatens regular food distribution. We also know that the inputs in our current food system long-term is unsustainable. Mono-crop intensive farming systems require larger and larger inputs of oil/gas, fertilizer, insect-spraying, machinery, and water, in spite of advances in questionable agriculture technology. I will not even go into the dangers of GMO. So, short-term dangers are present and long-term sustainability dangers are present. How should one invest in food in a way that covers all possible outcomes. Covering all possible outcomes is impossible. So, we will focus on making the local system (the one we have control over) antifragile.

Buying food and storing it. If I become unemployed, I can eat the food. If the food distribution system breaks down for a 5 day to 30 day period, I have something to eat and share. If the long-term system becomes more and more expensive, I have something to eat or supplement what I can afford or give away to people who can not afford unaffordable food. If nothing happens I can still eat the food and save the food budget money for another expensive. (gg is pretty sure that some expense will go up in the future.)

Starting a patio garden or lawn garden depending on place is another option for those that can not afford to spend more money on food than is currently budgeted. Just growing and eating your own lettuce or other fresh vegetables can save money and be more healthful. You are more apt to eat the food you grow because of the time and energy you put into it. I will not mention the health benefits of getting outside on a regualr basis to tend and weed you garden, even if it is just a container on the balcony.

These are just a few thoughts.

How can a gold investment or a real estate investment be antifragile? How can a stock investment be antifragile? Think beyond robust to antifragile. Something that gets stronger or more valuable as the current centralized system breaks down.